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Are Brits the victim of ‘Greedflation’? Bank of England study finds little evidence

The study is seen as the Bank of England’s first in-depth assessment of the greedflation debate

A latest study from the Bank of England found that the only companies able to squeeze higher profit margins amid the inflation and the resultant cost-of-living crisis in the United Kingdom, since the beginning of the Ukraine war, were the ones which has a significant hold over the markets.

The study, which found no widespread evidence of businesses exploiting their British customers in the guise of ‘Greedflation’, also stated that the excess profits were only generated by certain sectors like energy and retail. The report also noticed profits falling across the economy as businesses were facing higher costs.

The study is seen as the Bank of England’s first in-depth assessment of the “greedflation” debate, an idea that blames companies for using the cloak of the rapidly rising cost-of-living to widen their profit margins.

The report’s authors, Bank of England economists Sophie Piton, Ivan Yotzov and Ed Manuel, stated some measures showing increasing profits in the 18 months since the beginning of the Ukraine war but these tended to conflate firms operating under market conditions with the public sector. These measures also omitted important corporate costs.

The authors remarked, “We construct an alternative measure of corporate profits to capture UK firm earnings in excess of all production costs. This measure has been declining since the start of 2022, consistent with evidence from historical energy shocks.”

“This decline has not been uniform across firms, however: firms with higher market power have been better able to increase their margins; others have experienced large declines,” they stated further.

“Other studies, including one from the European Central Bank, have shown a widening of profit margins putting upward pressure on inflation, but the Bank of England economists said this had focused on the whole economy and included the self-employed and non-market sectors,” commented a Guardian report.

The Bank Underground blog further stated that profits were what a firm earned in excess of all its production costs and that any measure of excess profits needed to take into account the cost of holding and replacing capital, along with the wage bills.

Using the above yardstick, the Bank of England report observed that excess profits increased in 2021 during the rapid post-COVID lockdown recovery in demand, consistent with mark-ups increasing during the COVID recovery period.

“They started to decline, however, in 2022, when the Ukraine war started. This fall in excess profits partly reflects higher capital costs for firms who are now experiencing higher interest payments to service their debt (due to rising interest rates since start-2022),” it remarked further.

However, the study authors admitted that their observation lacked “granular data” on companies’ mark-ups since the higher energy prices aggravated by the start of the Ukraine war, while stating that the latest energy shock had a similar impact to those dating back to the early 1970s.

“The excess profit share and mark-ups decrease across all energy shocks, including that in 2022,” the report stated further.

However, the study stressed the aggregate fall masked significant differences across sectors, with mark-ups rising “significantly in the mining and quarrying sector (driven by oil and gas extraction firms), as well as in some other sectors (e.g. wholesale and retail)”.

It also found that profits were more negatively affected for companies specialising in energy-intensive products, and less negatively affected for those with fewer competitors.

The Bank of England study went on the same line as the Office for National Statistics (ONS) data, which reported that the profitability of private non-financial corporations grew by 0.1% between the last quarter of 2022 and the first quarter of 2023.

The ONS, in August 2023, also found that the net rate of return, a measure of corporate profitability, was at 9.9% for the first quarter of the 2023-24 financial year.

The net rate of return, in the simple language of economics, is the economic gain, or profit, shown as a percentage of the capital used in production.

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